Standing Committee F

[Mr. Joe Benton in the Chair]

Finance Bill

(Except clauses 4, 19, 23, 26 to 29, 87 to 92, 131 and 134 and schedules 1, 5 and 38)

Clause 62 - First year allowances for expenditure wholly for a fence trade

Amendment proposed [this day]: No. 99, in page 40, line 21, after 'first-year', insert 'and writing-down'.—[Mr. Chope.] 
 Question again proposed, That the amendment be made.

Joe Benton: I remind the Committee that with this we are taking the following amendments: No. 100, in page 40, line 27, after 'first-year', insert 'and writing-down'.
 No. 101, in page 40, line 31, after 'amendments', insert 'relating to first-year allowances'. 
 No. 102, in page 40, line 32, at end add 
 '(4) The amendments relating to writing-down allowances made by that Schedule have effect for chargeable periods beginning on or after 1st January 2003.'
 No. 103, in schedule 21, page 252, line 4, at end insert— 
 '6A In section 56 subsection 7 shall be replaced with— 
 ''(1) The amount of the writing-down allowance to which a person is entitled for a chargeable period is a percentage of the amount by which AQE exceeds TDR, as shown in the Table— 
 AMOUNT OF WRITING-DOWN ALLOWANCES Type of AQE AmountAQE incurred on the provision of plant and machinery for use wholly for the purposes of a ring fence trade which is not excluded by section 46 (general exclusions) 50%  All other AQE 25%  
 6B In section 56 after subsection (7) add— 
 ''(8) The increased writing-down allowance for ring fence trades will only be available for chargeable periods beginning on or after 1st January 2003. 
 (9) In this section ''ring fence trade'' has the same meaning as in section 4SF.''.'
 No. 104, in page 255, line 30, at end insert— 
 '14 In section 418, subsection (1) shall be replaced with— 
 ''(1) The amount of the writing-down allowance to which a person is entitled for a chargeable period in respect of qualifying expenditure is a percentage of the amount by which UQE exceeds TDR, as shown in the Table—
 AMOUNT OF WRITING-DOWN ALLOWANCES Type of UQEAmount UQE on the acquisition of a mineral asset10% UQE for use wholly for the purposes of a ring fence trade50% All other AQE25%''
 15 In section 418 after subsection (6), add— 
 ''(7) The increased writing-down allowance for ring fence trades will only be available for chargeable periods beginning on or after 1st January 2003. 
 (8) In this section ''ring fence trade'' has the same meaning as in section 45F.''.'.

Christopher Chope: I think we had more or less concluded the discussion. Just before the break, the Financial Secretary to the Treasury gave us some very interesting figures. I am sure that there will be further comments on the subject, but I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 111, in page 40, line 32, at end add—
 '(4) The Treasury shall report no later than 31st December 2002 on the net monetary effect of this section and sections 90 to 92 of this Act.'.
 The amendment would require the Treasury to report the net effect of the tax changes, including the enhanced allowances affecting the oil and gas extraction industry, largely because there appears to be, on the same basic evidence, substantial differences between the numbers reported by the industry on the expected impact and the Government's position. The amendment is in essence partly a probing one to require the Treasury to justify its assumptions and calculations. It is possibly more than a probing amendment in that, if the Government are not willing to see the light at this stage, we feel that the policy needs to be kept under close review and there may be a case for including a report on the impact of the measures. 
 On Second Reading, the then Chief Secretary to the Treasury argued that the negative effect of the additional 10 per cent. tax on investment would be neutralised by the new 100 per cent. first-year allowances, and the Financial Secretary has continued that argument today. As she will be aware, the assessment of the industry is that new investment of some £10 billion will be lost between now and 2010, including a loss of some 50,000 jobs. It is worth pointing out that, on a rough and ready calculation, the income tax and national insurance lost as a result of job losses is equal to approximately half of the lost additional £7.6 billion of tax revenues. 
 The other crucial point in terms of the principle and effectiveness, or otherwise, of the capital allowances is that the future of the North sea industry is increasingly in the hands of smaller companies. The North sea is and will become increasingly more immaterial to 
 major operators such as BP. However, many smaller companies do not have the existing production to benefit from the 100 per cent. capital allowances. In their early years, it is very rare that they are profitable, and as we are aware, financing costs on borrowing to finance new investment are not allowable against the extra 10 per cent. tax. 
 For example, two start-up companies are involved in redeveloping the Argyll field. Typically, a field has a life of seven years, and is not normally profitable for at least the first three years. That is the crucial territory. Increased capital allowances cannot be effective for new investment if there are no profits to set off against those capital allowances, unless, with a bit of luck, they become profitable well down the line. Bruce Dingle, the chief executive officer of Venture Production, a typical new entrant, has made the point that start-up costs are spectacular where every other late-stage basin such as the North sea receives real incentives to maintain and stimulate investment and production, and not disincentives, which the higher tax rate represents, or non-effective capital incentives, which the 100 per cent. allowance constituted companies have not got the profitability to make use of. 
 We have already touched on the nature of the Financial Secretary's reply and on the economic data. The point that I stress and that is crucial to the amendment is that the UK Offshore Operators Association has used the same economic information and basis for forecasting investment as the Government. However, the industry trade body and the Government have reached vastly different conclusions about the impact of the extra taxation and capital allowance packages. 
 Not only did the Chancellor stress on record the importance of not exploiting North sea recovery in its mature stage through a changed and excessive tax regime, but the Secretary of State for Trade and Industry in November 2000, before his movement elsewhere and subsequent resignation, welcomed the £1 billion new investment. He commented that the Government had created a stable tax regime to which the industry was responding well. The Government cannot be surprised that the industry feels that it has been badly betrayed. In November 2000, the Chancellor said: 
 ''It has been put to me that North sea oil companies earning higher profits from higher oil prices should be subject to special taxes, but I can tell the House that I am determined not to make . . . decisions based on short-term factors. The key issue is the level of long-term investment in the North sea. This will be the approach that will guide Budget decisions in future.''—[Official Report, 8 November 2000; Vol. 386, c. 317.]
 The Government are apparently attracted by a £10 billion decline in investment and 50,000 job losses. The Chancellor's words meant, as with so many things, the very opposite of what they said. 
 We are on serious territory. One could understand a Government going for a tax grab if they thought that they could get away it and wanted to be purely opportunistic—that is what they did with pension funds. However, such behaviour will rebound on 
 them. The £5 billion pension tax grab has wrecked occupational final salary schemes, and, mark my words, this tax grab will severely damage North sea oil investment.

Edward Davey: I support the amendment. I am glad that we have the opportunity not only to rehearse arguments heard prior to the intermission, but to develop further ones. I learnt from my hon. Friend the Member for Gordon (Malcolm Bruce) during the intermission that he knows of several companies that are not going ahead with investment. He feels that the level of activity will fall.
 This morning, the Government said that they had heard of no examples of people not going ahead with investment. It may be that they have not heard of any because of the fact that investment has not gone ahead. It would be difficult for the Treasury to, shall we say, prove a negative. However, in the United States many small business that would otherwise undertake exploration and consider drilling in marginal fields are not doing so. The word is that Britain no longer has a stable tax regime, or one that enables a profitable return, so investment decisions are not going ahead. Amendment No. 111 would therefore be appropriate. By the end of the year, we would be able see real figures rather than those dreamt up. We are not allowed to see the evidence for the figures. 
 That takes me back to the point about leasing, which I made in an earlier intervention on the Minister. It has come to my attention that a large section of the industry, which is exploited by small and medium-sized enterprises, depends on the leasing of assets. That does not appear to have been taken into account in the Government's modelling and tax proposals. Some companies use capital leasing, by which they depend on a non-oil company having bought an asset, which they lease from it. Of course, such a non-oil company will not be able to benefit from the allowance that the Government propose in the clause, and will have to pass the extra cost down the line. A small business that is leasing will get no benefit from the allowance because it is leasing an asset from a non-oil company. It will therefore be hit by the charge and there will be no compensation to it. 
 The Government say that they will promote that important, marginal, growth sector through their structure, but they will cause real damage. They are trying to persuade the Committee that the structure on which they have landed will produce a spurt of investment and increase returns, but the hon. Member for Arundel and South Downs (Mr. Flight) and I have quoted examples that suggest that the opposite will be the case. Although the amendment is in many ways a device to help provoke debate, if they were to accept it, they would call our bluff and that of the industry. We could make an analysis, which would be available to the House of Commons by the end of the year, to drill down to the measure's monetary effects. Some people suspect that the Government will not reach their revenue estimates because they will do too much damage to investment in the oil industry.

Tom Harris: I rise to make a few brief points. I was near to tears listening to the heart-rending pleas from Opposition Members because I had no idea that multinational oil corporations were in such difficulties. Like me, my hon. Friend the Financial Secretary to the Treasury—I hope that I have got her title correct because she has been promoted—is a former journalist who will have learnt the aphorism by which to identify a news story: when a dog bites a man that is not a story; when a man bites a dog that is a story. When businesses complain about taxes that is not a story; if businesses were to welcome new taxes that would be a story.
 The argument presented today by Liberal and Conservative Members is based purely on the premise that multinational corporations will have to pay extra taxes. That is a shame. I wish that we lived in a world in which those companies did not have to pay their fair share, but much of the extra revenue that will come into the Treasury will be used to enhance public services.

Edward Davey: In using an analogy from the newspaper industry, the hon. Gentleman has shown that spinning has gone too far. He should be defending the jobs of Scottish citizens and his constituents.

Tom Harris: I am more than happy to defend jobs in Scotland and elsewhere in the United Kingdom, which is something that Opposition Members have not done in this debate. The taxation regime for the oil industry in the United Kingdom is benevolent compared with that in other oil-producing countries. I do not believe some of the arguments used by Liberal and Conservative Members. It is right that the oil companies should pay their way. They are not being asked to pay more than is due, but simply a fair amount. I hope that the Government will recommend voting against the amendment.

Howard Flight: I was not able to interrupt and, with the greatest respect, the hon. Gentleman has missed the point. With a mature field such as the North sea, there is a delicate argument about the right level of tax to generate the greatest revenues and sustain rising investment and jobs. The argument is not ''bleeding hearts for large oil companies''; it is the economic argument that he will hear from not just the industry but outside specialists, indeed the leading specialist in the territory. The Wood McKenzie report, published only last February, contains an analysis of the maturity of the North sea and the fiscal prospects. It concludes that there is no room for additional fiscal rent to be extracted from upstream companies on an expected-monetary-value basis.
 Our argument is, ultimately, a pragmatic economic argument. We are saying that the Government's projections and numbers are wrong, both in terms of impact on investment and in terms of revenue potential.

Tom Harris: Will the hon. Gentleman explain how his party would fill the gap that was created by a refusal to proceed with this tax change?

Howard Flight: I fear that the hon. Gentleman did not hear what I said. If he does the sums in terms of revenues and lost revenues, he will find that the net tax benefits will be nothing like those forecast by the Government. Moreover, as was pointed out earlier, even the gross figure may not be anywhere near the Government's forecast.
 Let me point out, with respect, that we are not the Government. It is the Government's job to decide where they will raise revenue. We are merely saying that, pragmatically, we believe that the proposal is against the national interest. It will not raise revenue. It will reduce North sea production. It will worsen the current account balance. It will lose jobs, and people will have to be supported by welfare payments. We think that the Government's judgment is wrong.

Iain Luke: The hon. Member for Kingston and Surbiton (Mr. Davey) mentioned jobs. My constituency on the east coast of Scotland has lost jobs in the past because of investment decisions by big multinational companies in the North sea, which have concentrated their operations in Aberdeen.
 We are currently seeing a change in the nature of operations in the North sea. The larger North sea oil companies are moving, as is inevitable. The hon. Gentleman may have read an article published recently about the huge investment BP is making in, for instance, the Caspian sea. I believe that, in many respects, the North sea will go the same way as the gulf of Mexico. A number of big American companies moved from there to other fields. 
 I think the Government are right to raise taxes, but I also think it right for the Opposition to raise questions. We are talking about an operation that still has a reasonable medium and long-term life. We must protect those jobs. We must also ensure that the revenue we obtain from companies pays for what they obtain from the country. Ultimately, we should establish the right price for a barrel of oil, which is higher than it has been for a long time, and what we should raise in revenue. That will produce the right balance. 
 Earlier, we talked about decisions that had already been made, involving 50,000 lost jobs. I believe that the decision to cut 500 jobs, at a time when there was a lot of tension in Scotland, was made before the text of the Budget was known. Decisions were made on the restructuring of business of big multinationals from the North sea to other areas. Most of the movement is long term. The chief executive of BP made that point at a meeting of the UK Offshore Operators Association. He did not believe that a 10 per cent. increase in corporation tax would have an immediate effect on investment in North sea oil. The hon. Member for Gordon apparently knows about that. Anyway, the chief executive believed that in the long 
 term, given the corporate decisions that must be made elsewhere, the big firms would move to more profitable fields. They would not linger. That is the nature of the business: it is a cut-throat business. 
 Experts in the Scottish press who investigate the Scottish oil industry know that the natural process--it happened in the gulf of Mexico--is that smaller companies move into the gap left by bigger players when they eventually sell their interest.

Howard Flight: I agree entirely with the hon. Gentleman's diagnosis, but the logic is that new ventures and smaller businesses will be expected to keep the oil industry in the North sea going. I would be interested in his opinion of the package of measures for those companies, which is at the heart of our concern about the combination. The capital allowances will not be an effective incentive for investment because those companies are not profitable enough to use them.

Iain Luke: The measures are a first step because production in the North sea is changing. An article in Scotland on Sunday stated:
 ''Colin Welsh, the European managing director of Simmons & Company, the American energy investment firm, predicted new exploration''— 
new investment and new production players would form a group to capitalise on the sale of holdings in the North sea. The package is there, but the trick is to question and probe such packages. The Treasury must ensure that they are effective and, because of the number of jobs left in North sea oil, they must be reviewed regularly. 
 I sympathise with some of the amendments, but the Government have taken a balanced decision on the revenue that they will extract from the corporation tax increase and the need to run the national budget. Given the number of people who work in the industry and need to use the health service and social services, a balance must be struck. There is still a lot of work in the North sea and I have attended several meetings as a new member of the UK Offshore Operators Association. In Dundee recently, I visited schools engineers clubs where the success of North sea oil was a big issue. Innovation has been essential to capitalise on difficult oil fields that would previously not have been capitalised on. 
 The Treasury and the Department of Trade and Industry must ensure that the UK Offshore Operators Association and operators in the North sea are kept closely informed so that they know what is going on. The Government's decision marks a definitive moment in the balance of production in the North sea. On balance, I believe that their decision is correct and that the measures will help newer businesses to enter production fields, but we must keep a close eye on that because it is still a vital strategic industry for economic production.

Mark Field: I support the comments of my hon. Friend the Member for Arundel and South Downs. I
 take on board with interest the robust comments of the hon. Member for Glasgow, Cathcart (Mr. Harris) and the more compliant comments of the hon. Member for Dundee, East (Mr. Luke), who obviously has a lot more experience of the cut-throat nature of the oil industry than some Conservative Members. Those comments were entirely fair.
 The substantive issues concerning the clause have been lost in our discussion of the previous group of amendments. Amendment No. 111 covers a narrow point. We want the Treasury to analyse and examine the net monetary effect. We do not know what the effect on the industry as a whole will be and it would be sensible, before taking a path along which it would be difficult to retreat, at least to examine the net monetary effect. The hon. Member for Glasgow, Cathcart may be right and the provision may lead to more money coming into the Treasury's coffers--that is the intention--to fund the national health service and other public services. However, there must be a real risk that it will have the opposite effect and that, in having negative effects not only on multinationals but on small start-up companies in the oil business, many of which will employ significant numbers of people in the UK, they will not result in any great monetary advantage to the Treasury. It seems that the proposal is a sensible compromise, given that there are two distinct schools of thought about the oil industry. Therefore, I hope that the Financial Secretary will give it further thought.

Michael Jack: In the intervening period since the previous time we gathered in this Room, I managed to obtain some official Government figures on the size of the investment that underpins our discussions on this part of the Bill. It is a great sadness that the Treasury cannot be as open with public information as the Department of Trade and Industry is. The DTI carries out an annual survey of investment in offshore oil. The survey results for 2001 make very interesting reading, because they show the fragility of the forward investment position in the oil and gas industry. That is why Opposition Members have made the points that they have. For the record, I would like to share the information with the Financial Secretary in the spirit of transparency and openness and perhaps explore with her whether the Treasury's figures match up with those of the DTI. It would be very interesting to know whether, in the world of joined-up government, they have the same view.
 For what I might call the firm area of oil and gas exploration—so-called sanctioned fields, which are defined as fields in production or under development— including sanctioned incremental investment, the sums are £2.3 billion for 2002, £1.3 billion for 2003, £800 million for 2004, £600 million for 2005 and £200 million for 2006. The point has been made that, although at present there may be a good level of activity relative to the maturity of our continental shelf fields, it is clear that forward decisions for the years from 2004 onwards are very much in the pending tray.
 If we consider the next category, which is probable fields—fields that are likely to move forward during the next four to five years—we find a much thinner picture, in the same way. The figures are £1.8 billion for 2002, £2.5 billion for 2003—an increase, but it is steadily downhill after that—£1.8 billion, £700 million and £400 million. Given the dearth of agreed investment, it would be surprising if the measures that we have been discussing did not substantially affect forward investment prospects. 
 I would be very interested to hear why the Financial Secretary believes in the robustness of her view against the real-world background in which the actual levels of committed investment rapidly tail off from 2004 onwards and in which the Government's proposals will bite. That is why we in the Opposition are asking for some mitigation.

Howard Flight: Is not it the case that the DTI-sponsored Palec cogency studies broadly found that 32 jobs are lost for each £1 million decrease in investment? Therefore, central to our argument is the issue not just of investment forecast but of the effect on jobs.

Michael Jack: My hon. Friend has been carrying out parallel research, and I am delighted that he has augmented the line that I have been putting forward. I shall not rehearse all the figures, but if one considers parallel aspects of North sea investment that might not necessarily be affected by the measure, one finds a similar lack of absolute forward commitment the further on they go. [Interruption.] The Minister's body language is always instructive—she is shaking her head as if to say, ''Well, you ought to know.'' That is true, but we are talking about the difference between absolute and committed investment and investment which, if the level of activity presently being enjoyed on the continental shelf is to be sustained, will have rapidly to increase above the amount that has already been committed.
 That is the point—the rate of return will be the main problem, particularly for those fields that do not have a profitable cash flow at the end of the first year to absorb the full effect of the 100 per cent. write-off. That type of field is likely to be the first to perish in terms of the investment decision-making process. Sadly, the Minister will not discuss how she has reached her conclusions. How are we to know whether her arguments are robust? The figures are telling and they underpin some of the arguments made by my hon. Friends on the Front Bench in support of their amendments.

Mark Hoban: I had not intended to speak in the debate on the amendments to the clause on oil taxation, as it is not an area with which I am particularly familiar. However, the cases that we have heard put on the impact of this change in taxation on the oil industry have been polar opposites. The hon. Member for Glasgow, Cathcart suggested in his customary style that the business community is crying wolf over this matter. He was ably supported in that case by the Minister. Conservative Members have
 taken an alternative view—that the changes will have a negative impact on the oil industry and could lead to a considerable loss of jobs and investment.
 It is important that we continue to monitor the impact on investment and jobs of the changes in oil tax. The amendment tabled by my hon. Friend the Member for Arundel and South Downs, which seek to provide for a report on the impact of this measure on revenues, is important and we should all support it. The oil fields of the North sea are an important asset that should be exploited fully in the country's interests, not purely in the economic interests of the country but in the interest of those who work in the North sea. 
 I declare an interest, in that my brother-in-law is a deep-sea diver working in the oil sector. I am acutely aware, based on his patterns of employment, of how fragile the investment in oil fields is, as my right hon. Friend the Member for Fylde (Mr. Jack) said. When the economics are good, my brother-in-law's services are in great demand both in the North sea and elsewhere; when the economics are bad, he has—to use a phrase of a former Member of this House—more time to spend with his family. 
 For my brother-in-law's sake and for the sake of all those who work in the sector, it is important that the Government continue to monitor closely the impact of this legislation. The Government would be failing in their duty to ensure that the oil fields of the North sea are fully exploited if they refuse to support the amendment.

Ruth Kelly: The contributions on the clause have been full and well informed, and I found those of my hon. Friends particularly interesting. I enjoyed the remarks of the hon. Member for Arundel and South Downs and the way that they put the clause in the context of the Chancellor's Budget statements, which set out clearly his intention to raise a fair share of revenue for the nation from North sea oil while encouraging long-term investment and not basing any policy on short-term changes. That is exactly what we have tried to do with this package of measures.
 The amendment, as I understand it, is designed to require the Treasury to issue a report on the clause's net monetary effect on companies. The clause will have a 100 per cent. positive impact on companies' cash flow, so perhaps the Opposition did not mean precisely what they put down in the amendment. Perhaps they were talking about the impact of the total package on the net monetary value, which we have already debated at length on the Floor of the House.

Howard Flight: The amendment refers to
''sections 90 to 92 of this Act'' 
as well as to the clause, so it is clear.

Ruth Kelly: I thank the hon. Gentleman for clarifying that point, but we debated the subject at length on the Floor of the House. The package of measures will have a positive net monetary effect for the nation as a whole. That is its intention.
 The hon. Gentleman questioned whether the North sea had the capacity to deliver a fairer share of revenue to the Exchequer while maintaining activity and investment incentives. Again, I think that I went through the subject in detail on the Floor of the House. As I said then, following the tax changes made by the Conservative Government in 1993 and the abolition of petroleum revenue tax, the rate of return in the oil industry rose from 10.5 to 34 per cent. last year. By comparison, other non-financial industries made an average rate of return of 11 per cent. last year. Some might try to argue that that difference was due to the high oil price, but that is not the case.

Michael Jack: Will the Financial Secretary give way?

Ruth Kelly: I will if the right hon. Gentleman lets me make my point. The rate of return for the North sea was higher than that of other industries in each of the past nine years, even in 1998 when the oil price fell sharply.

Michael Jack: For the sake of clarity, will the Financial Secretary tell me how the rate of return was calculated and who calculated it?

Ruth Kelly: The right hon. Gentleman knows full well that I set out on the Floor of the House the precise assessment criteria and appraisal methods that we used to reach our conclusions on rates of return. I shall not repeat that today. I do not accept the accusation that 50,000 jobs are under threat and that activity will fall as a result of the Budget changes--an accusation that the oil industry is making and that the hon. Member for Arundel and South Downs has repeated today.
 I am talking about the impact of the Budget changes on investment activity and jobs, not about whatever else in the external environment may affect the oil industry. I would be completely foolhardy if I were to make an individual forecast of what is likely to happen in relation to that.

Howard Flight: The rates of return issue is central to the ability to pay tax. While we can debate the historic rate of return, the crucial issue is not the history but the future. The hon. Member for Dundee, East mentioned the change in the North sea from large companies to small ones. Given that change and the increasing marginality of fields to be developed, the relevant issue is what the future rate of return will be to sustain the additional taxation. The Financial Secretary says that it is not her job to calculate that, but in a way that is exactly what the Government must do when considering the pluses and minuses of such tax changes.

Ruth Kelly: I agree, but it is not our job to try to predict how individual companies will calculate their post-tax rates of return. In aggregate for marginal fields with the new investment coming on-stream, the post-tax rate of return will increase as a result of the measures. The benefits of the first-year allowance
 outweigh the effect of the increased tax take for marginal investment. We should therefore see new developments and projects as a result of the changes.
 Of course, more profitable projects will pay more tax. The regime is designed precisely for that to happen. Even after the tax changes, the more profitable projects should still make respectable profits, and we shall have an oil industry regime that compares favourably with any in the rest of the world.

Michael Jack: The Minister clearly stated that, in the Treasury's judgment, there is a relationship between the taxable potential of the North sea and the rate of return. Will she say whether the same principle will guide the Government in taxation of other areas of economic activity, so that those with a rate of return in excess of 30 per cent. can prepare for the inevitable—in other words, for more special taxes?

Ruth Kelly: The right hon. Gentleman will know that there are many reasons why particular rates of return are made in different industries, and whether they are sustainable over the longer term or temporary. I remember him questioning me on the Floor of the House on fairness. Over a long period, the post-tax rates of return have been significantly higher than for other non-financial industries. Those who argue that the North sea does not have the capacity to pay more tax, given its immense cash flow, are treading on difficult territory. I do not believe that there is no capacity to pay more.
 The hon. Member for Arundel and South Downs made interesting points about new entrants to the industry, as did my hon. Friend the Member for Dundee, East. Of course we want to encourage new entrants into the industry to develop new fields. The hon. Gentleman said that tax allowances are not available to companies that do not make taxable profits, but by definition tax allowances are unavailable when there is no taxable capacity. As I said when responding to a previous amendment, allowances are not lost when companies fail to generate profits immediately, but may be carried over from year to year. 
 The treatment given to companies in the industry is no different from that for new entrants in other types of business. Indeed, there is a very active market in North sea field interests, and new entrants who want to benefit early from the investment allowance can choose to buy into a profitable field, which would give them a stream of income against which they could use the allowance in the first year. It is normal for North sea new entrants to do that, as it is a pragmatic response for those who want to gain those advantages. The problem that hon. Members have identified is more apparent than real, but we shall continue to monitor the situation and consider the impact. 
 The hon. Member for Kingston and Surbiton asked about not giving 100 per cent. allowances to small companies that lease and pay 40 per cent. tax. The upfront tax benefit will not be passed directly to the lessee, but might be passed indirectly in the form of lower rentals spread over the term of the lease. Extending the first-year allowances to assets for 
 leasing would lead to more investment, and we have designed our measures to encourage new investment, as the hon. Gentleman knows. We shall continue to monitor the operation of the scheme.

Edward Davey: The mechanism by which the Minister suggests that small companies might benefit from allowances would depend on contractual relationships, not Government policy. The companies are concerned because they are being hit by the extra corporation tax—which is Government policy—while getting nothing back from the Government. The mechanism that the Minister describes will give no succour to SMEs in the industry.

Ruth Kelly: As I said, we shall continue to monitor the scheme in operation. If the problem turns out to be real, companies will be welcome to talk to us about it. I do not believe that it is a problem, but we shall keep a careful eye on it.
 North sea oil and gas are scarce national resources. That is why they have managed, over such a long time, to produce returns that often exceed a normal commercial rate. At times, producers make large profits because of movements in the world oil price. Over the past few years, they have not generated a fair share of revenue for the Exchequer. In this measure, we have combined an increase in the tax take with a very generous first-year allowance, which will continue to stimulate new investment and activity in the sector. 
 I emphasise again that I am not in the business of forecasting what will happen around the world. However, these particular Budget measures should act as a stimulus to investment and activity in the sector. 
 The right hon. Member for Fylde points to DTI figures and suggests that the DTI is somehow more open and transparent than the Treasury. Of course, I do not accept that. We work in close co-operation. Work at the DTI informs our assessment at the Treasury; that is why we use those figures as the basis for our analysis and for the estimates that are published in the Red Book. I set out on the Floor of the House the basis for our entire analysis. I do not believe the figures that the oil industry has quoted; the new allowance will provide a generous cash boost for the industry at a time when it is expected to contribute a fairer share of revenue. For those reasons, I suggest to the Committee that it should not accept the amendments.

Howard Flight: I remind the Committee that the amendment simply calls for a study of the impact of the Government's proposed measures to be made by the end of the year. It does not change the measures. It is strange that the Government should want to resist that, because either they will be proven right or the industry and we shall be proven right. Perhaps 31 December 2002 is a little early, but if I were doing the Minister's job, I would want to know whether I had got policy right and I would accept such an amendment. It is a commonsense proposal.
 The Minister rightly referred to oil and gas. The southern basin returns on gas are already negative and there are different calculations for oil as opposed to gas; gas is at a price equivalent to some £10 per barrel. These measures are to apply to both. How anyone at the Treasury can have thought that the measures would stimulate new investment in gas I cannot imagine—they will do the reverse. It is evident from the Red Book that the combined measures are designed to be substantially tax positive, raising £7.6 billion over eight years. The argument that the measures will encourage investment seems to be nonsense. 
 Our case is that, given the dramatically changing structure of the North sea, the wishful thinking aspect of combining accelerated first-year allowances and higher ongoing tax will not work. I was pleased to hear the Minister say that the Government would look further at the issue. She seemed to have taken the point that that might not be any incentive for new venture operations. 
 However, we think that any prudent Government—we have such a prudent Chancellor, after all—would double-check whether their theoretical calculations were correct, especially in relation to an industry that makes an important contribution to the current account balance and employs 260,000 people in Scotland. Therefore, I shall press the amendment to a vote. 
 Question put, That the amendment be made:—
The Committee divided: Ayes 6, Noes 17.

Question accordingly negatived. 
 Clause 62 ordered to stand part of the Bill.

Schedule 21 - First-year allowances for expenditure wholly for a ring fence trade

Amendments made: No. 94, in page 251, line 4, leave out 'within the relevant period'. 
 No. 95, in page 251, line 6, leave out 'not' and insert 
'at no time in the relevant period'.
 No. 96, in page 251, line 8, after 'is' insert 
'at any time in the relevant period'.
 No. 97, in page 251, line 11, leave out from 'periods' to second 'the' in line 14 and insert 
 ', beginning with the incurring of the expenditure, first ends, namely— 
 (a) the period ending with the fifth anniversary of the incurring of the expenditure, or 
 (b) the period ending with the day preceding'.—[Ruth Kelly.]

Howard Flight: I beg to move amendment No. 110, in page 251, line 41, leave out '24%' and insert '100%'.
 In essence, the amendment would make the 100 per cent. first-year allowance apply to all assets, not only those with an alleged useful life of less than 25 years. Given that the rate of writing-down allowance on long-life assets is 6 per cent., the first-year allowance of 24 per cent. does not seem to be especially generous. Indeed, I should be interested to know how the Government came up with that figure, especially as oil and gas extraction is a long-term project, requiring assets with a useful economic life, which may be 25 years. The logic behind extending the 100 per cent. allowance to all investments is, first, that the proportion of assets in the long-life category is relatively modest, about 10 per cent., so the measure would not have a huge impact on tax revenues. 
 Secondly, many long-life assets turn out not to be long life, particularly as many of the fields currently being developed may not have a long life. In practice, what falls into such a category may not be used for 25 years. I understand that there was no logic to the Government's having selected 24 per cent. Under the new 40 per cent. tax regime, particularly when long-life assets represent a relatively higher proportion of the total investment, the lower 24 per cent. figure could lead marginally to negative decisions about investment prospects. 
 It is not a huge issue, but I wonder whether it is worth the candle to make such a theoretical separation. I wonder whether the Government are pinning their hopes on capital allowances keeping investment going and, therefore, whether it would be rather more practical and sensible to give the full 100 per cent. capital allowances to all investments.

Ruth Kelly: I thank the hon. Gentleman for the constructive manner in which he spoke. The amendment would indeed give long-life assets with a span of at least 25 years the full 100 per cent. new first-year allowance. Although I understand the hon. Gentleman's argument, he has not made a real case for such a change. We have increased fourfold the allowance for the vast bulk of capital expenditure in the North sea in the first year—from 25 per cent. to 100 per cent. The increase for long-term assets, too, is increased fourfold—from 6 per cent. to 24 per cent. Long-life asset provisions exist to align the rate of depreciation for tax more closely with commercial depreciation. A rate of 24 per cent. is far in excess of normal commercial depreciation, and is therefore extremely generous for assets that have a long life.
 The hon. Gentleman pointed out that not many assets in the North sea have a long life, and said that it might not be that expensive to extend the 100 per cent. rate to long-life assets. I agree that not many long-life assets are to be found in the North sea, but such assets 
 are indeed expensive and extending the rate would have a significant revenue cost to the Exchequer. In other areas, such as for small and medium-sized enterprises, although generous first-year allowances are made, they are not applied to long-life assets, which continue to attract 6 per cent. We see no case for increasing the allowance further. I therefore urge the hon. Gentleman to withdraw the amendment.

Howard Flight: First, I am interested to note that the logic of choosing 24 per cent. was the simple arithmetic of applying a multiplier of four and not a professional study of its impact on capital allowances. The Minister referred generally to a considerable cost, and I should be interested if she would quantify that figure. My understanding is that with about 10 per cent. of assets generally being long-life assets, the cost would not be hugely material. I have already set out our arguments. Ultimately, it is back to the principal argument—that it is part of a package designed to keep investment as high as possible. For all the reasons that we put forward, we would broadly argue that anything that is doable that is likely to be on the plus side if its revenue cost is not that great would be sensibly done.
 The Government still have not made their intentions clear about royalties, despite having loosely promised to do certain things, and I understand that, contrary to my previous understanding, that royalty is relevant to about 20 per cent. of new investment and is particularly relevant to maximising the recovery of an existing field and to the inner drilling of wells. I do not know whether the Minister has anything further to say about when the Government will complete the package. 
 Overall, we are not debating a huge issue of principle. I hope that the Government will consider it further. Notwithstanding the vote that we just had, if the Government were privately wise enough to do their own investigation of the effects of the package on the industry during the coming nine to 12 months, they could be a little more generous in this territory without a massive tax impact. I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 109, in page 252, line 4, at end insert—
'First-year allowances on mothballing costs
 6A.—(1) Omit section 161C(2) and insert— 
''(2) The decommissioning expenditure is to be treated as first-year qualifying expenditure under section 45F above.''.
 (2) Omit section 163(2)(b) and insert—
''(b) on decommissioning plant and machinery which has been brought into use for the purposes of a ring fence trade.''.
 (3) In section 163(3), leave out ''The'' and insert ''Where the plant and machinery forms part of an offshore installation or a submarine pipeline, the''
 (4) In section 163(5), after ''1998'' insert ''except that an offshore installation partly in relevant waters and partly not shall not be excluded from the definition of offshore installation for these purposes only.''.'.
 The amendment touches on a subject raised briefly this morning, when the Financial Secretary gave a response on which I would be grateful for further elucidation. The comments on capital allowances apply equally to the amendment and the cost of mothballing platforms. The decommissioning of infrastructure related to oilfields and the decommissioning of trans-median field installations part of which lie outside UK territorial waters, are currently excluded from the change to grant 100 per cent. first-year allowances. The Financial Secretary commented that her understanding was that mothballing did fall within the allowances. There is also an issue of onshore versus offshore. Surely it is anomalous that such types of expenditure should be excluded from the general change of the capital allowance system. Mothballing extends the life of a field when shutting down would terminate it; logic would suggest that all mothballing should qualify for the capital allowances.

Edward Davey: I support the amendment, and I should be interested to hear whether the Financial Secretary will place on the record the view that the hon. Gentleman said she expressed earlier today—that the capital allowances as currently construed do cover all mothballing expenditure. That is not my understanding. It is important that they should, because when the industry is trying to decide whether it can plan for the future and ensure that certain marginal investments might become profitable later on, if it can mothball various plant and machinery installations it can leave those options open and get better value from that investment, and the resources overall. It is important that the tax regime enables companies to retain their existing facilities if they could have a future use. I hope that the new regime that the Financial Secretary proposes will enable mothballing activity to retain the maximum allowances.

Ruth Kelly: I am happy to return to the issue of mothballing, and to set clearly on the record when the allowance applies and when it does not. The amendment would provide a 100 per cent. allowance to certain decommissioning expenditure that does not at present qualify for that allowance. The substantial costs of decommissioning offshore oil or gas fields that are incurred under approved abandonment programmes, are already relieved at 100 per cent. I do not believe that there is a case for extending the very generous investment relief that we are introducing in the clause to decommissioning expenditure that is not incurred under a specific approved abandonment programme, or is incurred other than in connection with the closing down of an oil or gas field.
 After all, the 100 per cent. allowance that we are talking about is carefully designed to stimulate future investment activity, not its demise. Therefore the rationale for the allowances not applying to mothballing during the development of a field is clear. The oil tax regime already recognises the special case of decommissioning offshore installations through a 
 100 per cent. allowance. I cannot see a case for further extending that allowance, and on that basis I ask the Committee to reject the amendment.

Howard Flight: I should like to ask the Financial Secretary for her estimate of the cost difference if the amendment were accepted. Are we talking about material sums because the complexity surrounding the qualification of some forms of mothballing seems to be unsatisfactory? Overall, the point is the same as that raised by the previous amendment. It certainly seems strange that closure qualifies while some forms of mothballing do not.

Ruth Kelly: The hon. Gentleman queries the cost of the measure. I can tell the Committee that it would cost tens of millions of pounds each year, which would not encourage new investment, to recognise the issues faced by companies engaged in normal commercial transactions and rationalisations. It would be a significant measure for the Exchequer to consider and would not tie in with our overall policy objectives. For those two reasons, I urge members of the Committee to reject the amendment.

Michael Jack: It is on the record that my hon. Friend the Member for Arundel and South Downs asked a perfectly reasonable question. He asked how much it would cost if his proposal were accepted. The Treasury says that it would cost tens of millions of pounds and would not be in line with its policy. We should receive a better and clearer explanation. If the Financial Secretary does not have the figure, will she commit herself to calculating and supplying it in due course? The question was perfectly respectable and we should have an answer.

Ruth Kelly: The right hon. Gentleman expects me to make a forecast today on normal commercial transactions undertaken by oil companies. I have given the Committee a reasonable projection that the cost of the measure will run into tens of millions of pounds, and it is impossible to give a more precise figure. I have set out why the proposal does not tie into our policy and, for the last time, I ask the Committee to reject the amendment.

Howard Flight: I thank my right hon. Friend the Member for Fylde for his intervention. The Financial Secretary is being cavalier, and I shall repeat the commonsense point to which she has not responded. Shutting down a field means that there is no chance of recovery. Mothballing is done deliberately in order to leave scope for further recovery when oil prices rise. There is an obvious inconsistency in shutting-down expenditure qualifying while mothballing expenditure does not. The policy is irrational.
 My right hon. Friend did not ask for the exact figure today, which would be unreasonable. There is, however, a difference between £10 million and £90 million. My understanding is that, relative to the total picture, the materiality would not be that great. Rather than suggesting that closing down should not get the allowance and all mothballing should get it, it is easier simply to say that all mothballing should get it.
 This is not a huge point, but the Government would be wise to keep their mind open and look at the measure's effect. If the result of not extending the allowance were to be that many marginal fields were closed down rather than mothballed, yet again the Government would have shot themselves through the foot. There is little point in pressing the amendment to a vote, but the Government should take a more in-depth approach to the matter. I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Schedule 21, as amended, agreed to. 
 Clause 63 ordered to stand part of the Bill. 
 Schedule 22 agreed to.

Clause 64 - Postponement of change to mark-to-market in certain cases

Howard Flight: I beg to move amendment No. 112, page 41, line 43, leave out '2002' and insert '2003'.
 The amendment is probing and asks whether the Government are satisfied from their discussion with the industry that their proposed starting date will work satisfactorily. The clause gives help to insurance companies required to move to a mark-to-market basis in relation to the profits and losses arising on their portfolio investments. For accounting periods ending on or after 31 December 1998, insurance companies have been required to account for the portfolio investments on a mark-to-market basis—that is, investments are recognised in the accounts on their market value, which is duly adjusted at each year end. 
 To use a mark-to-market basis leads to companies recognising unrealised gains and losses, which are taxable as they arise. Some insurance companies have continued to use the realisation method for tax purposes—that is, they have taxed gains and losses only when they are realised. For companies that organise their accounts based on the calendar year, the first point at which they are required to pay tax on a mark-to-market basis is 1 January 2002. 
 The industry feels that the arrangements are broadly satisfactory, and does not criticise or challenge them. However, there are outstanding discussions with the Revenue, and some concerns exist that the interaction between clause 83, and schedules 22 and 30, and clause 64 might have a problematic impact on insurance companies in due course. We can pursue that issue further when we come to it. Are the Government happy that everyone is geared up to cope with a starting date at the beginning of this year?

Ruth Kelly: I am grateful to the hon. Gentleman for setting out the purpose of the clause. I shall not repeat it because I am sure that the Committee has heard enough. The hon. Gentleman merely queries whether the industry is happy with the dates in the clause.
 The clause provides insurance companies with a special rule to allow them to postpone the move to a mark-to-market basis for tax purposes until 2002—a strict application law would make them go back to 1998. To be more precise, the previous basis of tax will still be available for periods of accounts that begin before 1 August 2001, which was the date of the announcement of the changes, and end before 31 July 2002. 
 The clause has been the subject of detailed consultation with the industry, the Association of British Insurers and others; they have expressed no desire to extend the transitional arrangements. The Bill reflects many of the points that they raised about the draft clauses published on 9 August. I hope that the assurances that I have given will persuade the hon. Gentleman to withdraw his amendment.

Howard Flight: This was a probing amendment. As I said, my understanding is that the industry is reasonably happy. I also wanted to ensure that the Government were happy, because if a new tax system is being introduced, taxpayers need to be able to deliver. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Clause 64 ordered to stand part of the Bill. 
 Clauses 65 and 66 ordered to stand part of the Bill.

Clause 101 - References to accounting practice and periods of account

Howard Flight: I beg to move amendment No. 179, in page 78, line 45, at end insert 'and'.

Joe Benton: With this it will be convenient to consider the following amendments: No. 180, in page 79, line 1, leave out from 'companies' to end of line 2.
 No. 181, in page 79, line 3, at end insert— 
'(c) means generally accepted accounting practice with respect to accounts of non-UK companies that are intended to give a true and fair view, or equivalent, as applied in their country of incorporation.'.

Howard Flight: The amendments have been tabled because the point has been raised that it does not make much sense to require all companies operating in the UK to use UK generally accepted accounting practice for their accounting. Many branches of such companies will not be UK-incorporated registered businesses and it would make more sense to allow those branches to use the GAAP of their own country rather than forcing them to use the UK GAAP in respect of their branch activities. To do that would create unnecessary administrative burdens for such branches and for companies which are incorporated outside the UK and thus not subject to UK company law but which, for whatever reasons, may be UK tax resident.
 It is possible that the profession has misunderstood the requirement in the clause, but I raise the matter to give the Government the opportunity to clarify their intention.

Ruth Kelly: There has probably been some misunderstanding. Clause 101 standardises definitions of accounting practice used in existing tax legislation. All accounting references are now to ''generally accepted accounting practice'', and one thing the clause does is to move into a general interpretation section a standard definition of GAAP that already appears in a number of places in tax law.
 The part of the definition of GAAP that the Opposition seek to amend says that GAAP means GAAP as it applies to UK companies. However, that is not a new idea—at least 10 different parts of the tax code specify that it is accounting practice as it applies to UK companies that must be followed. The clause brings all those different definitions into one place with one wording. 
 There is one important place where the fact that it is UK GAAP that must be followed has been made explicit. This is in the general rule governing the computation of profits of a trade in section 42 of the Finance Act 1998, which required taxable profits to be computed using an accounting basis which gave a ''true and fair view''. That wording in section 42 is being replaced with the new definition of GAAP, but the requirement to provide a ''true and fair view'' is maintained because that is required by the definition of GAAP. 
 The opposition amendments should therefore be resisted on two grounds. First, references in the tax code to accounting practice have made it clear that it is UK accounting practice that is meant. Secondly, in applying the UK tax system, and to be fair to all businesses operating in the UK, there must be consistency. Why should there be a tax advantage or a disadvantage for a company because it follows whatever is a true and fair view in some other state or country? The amendments assume that there will always be a ''true and fair view'' or an equivalent concept in every other country. Of course, we do not insist that overseas companies draw up their accounts using UK GAAP. We require it to be followed only for the purposes of computing tax. It is likely that company law and accounting rules in other territories would show much the same result as if the UK GAAP had been used. On the two grounds that I have set out, I hope that the hon. Gentleman will withdraw the amendment.

Howard Flight: I am glad that the Financial Secretary made it clear that there was no intent to require such non-UK-incorporated companies to use UK GAAP for their accounts. There is clearly an argument about tax fairness in terms of use of UK GAAP for UK tax calculation purposes, but the provision obviously adds to the burdens on businesses that have branches here, because their calculations for UK profits will be different from those for their overall accounts. Therefore, there will be yet more notes in the accounts explaining the differences.
 Clearly, in an ideal world, GAAP would be fairly common among at least the developed economies. I wonder whether the Government have considered how much tax materiality there is on the subject. The branch companies are mostly either north American or continental European. If the differences are not that major, is the exactness of the requirement to use UK GAAP for tax purposes worth the bureaucratic hassle? 
 What discussions have the Government had with the profession? Its representatives have raised the issue broadly with me. The issue is technical, not political, so we would not want to put the amendment to a vote, but I would like a further response from the Financial Secretary on those points.

Ruth Kelly: I have two points in response. First, there is nothing new in the provision. It makes a reference that was already in the tax system explicit by putting a definition in one place for ease of reference. Secondly, consistency of tax treatment in the UK is important. Although there may not be great differences between member states in the European Union, such uniformity is important. The last thing that we want to do is to introduce arbitrage when a company decides that it is advantageous for it to use one treatment rather than another. I urge the hon. Gentleman to withdraw the amendment.

Howard Flight: It is interesting that the Financial Secretary should say that the Government would not want to encourage arbitrage, as there is a massive and dangerous encouragement of arbitrage for self-employed small traders in the Bill, which will cost the Revenue a fortune.
 However, I have said that the issue is not major. I hope that the Government will keep it under review, and I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Clause 101 ordered to stand part of the Bill.

Clause 67 - Expenditure involving crime

Question proposed, That the clause stand part of the Bill.

Howard Flight: We have not tabled amendments to the clause, although we have tabled a new clause that has not been selected but to which I shall refer briefly. There are some measures in the clause that it is important at least to mention, so that we hear whether the Government are satisfied that the problems that might be raised would be manageable.
 Clause 67 stops UK companies receiving tax relief for payments made overseas that would have constituted a criminal offence if they had been made in the United Kingdom. It will largely affect UK companies operating in overseas territories through branch operations rather than through limited companies, mostly in developing parts of the world. However, it may make it prohibitively expensive for UK companies to operate through branches in areas where bribery is standard practice. That is unlikely to 
 lead to a significant loss of tax revenue in the UK, because most companies whose overseas operations are profitable will operate in such territories through limited companies in order to protect their overseas revenue from being taxed directly in the UK. In addition, it may affect the UK banking and financial services industry, which tend to use branch operations. 
 We would be interested to know why UK law only is considered to be the appropriate test, and why not criminal activities under local law. Is there an EU angle, in that UK companies operating through branches will be directly affected but those operating through subsidiaries will not? Is a sort of EU freedom-of-establishment principle involved? 
 Another and not immediately obvious consequence is that UK companies with controlled foreign companies will have to compute UK-equivalent profits after making an adjustment, which could lead to some overseas companies that were not CFCs becoming CFCs. That would obviously increase the administrative burden. It is probably not a major problem, but have the Government thought about it? 
 The Chartered Institute of Taxation has expressed support for the fight against criminal bribery, but it raises two particular concerns. It points out that uncertainty could arise if a foreign company had a UK branch that came within the scope of UK corporation tax, but a part of the foreign company unconnected to the UK branch paid a bribe that would be criminal under UK law. If, separately, the UK branch made a payment to the head office of the foreign company to cover central costs incurred by the company that benefited from trade with the UK branch, and as the bribe benefited the whole company's business, it could be shown that the management fee paid by the UK branch included a payment towards the bribe made by the foreign parent. Would the UK branch have to disallow part of that payment towards the central overheads? That would lead to an additional compliance burden, but it also raises questions about the UK's claiming extraterritorial and extranational jurisdiction. 
 The second and more general point is that there is a risk that the payment would be disallowed in several countries, which could result in the possibility of multiple taxation. That is probably a fairly weak point, but similar points could arise with other costs such as business entertainment. I wonder whether the Government have focused on such issues.

Edward Davey: I support clause 67. It is exceedingly welcome and long overdue. I always thought it wrong that the British taxpayer should subsidise what effectively is a criminal activity—the paying of bribes abroad. I know that it is the practice in certain countries, and that it is the only way in which some companies can do business, but I do not see why the British taxpayer should be subsidising it in any shape or form. This is exactly the right measure, and I am glad that the Government are taking it.

John Burnett: I agree entirely with my hon. Friend, but I wonder whether the Treasury, in formulating the clause, made a study of any similar laws that prevail in, for example, the United States, continental Europe or Japan. If so, I should be grateful if the Financial Secretary let us know whether the measure is part of a concerted effort by the advanced economic countries to clamp down on bribery and what similar provisions exist in the other countries with which we compete for overseas business.

Ruth Kelly: I want to thank the Liberal Democrats for expressing their strong support for the clause. I take the constructive comments made by the hon. Member for Arundel and South Downs in the same spirit. He asked some technical questions about implementing the clause, rather than questioning its validity.
 The clause corrects a technical anomaly in the tax rules on bribes and corrupt payments, to make it clear beyond doubt that tax relief is not available for bribes.The existing law denies a business tax deduction on any expenditure that constitutes an offence in the United Kingdom--in other words, if it is a criminal bribe. That virtually covers all the circumstances in which a United Kingdom tax-paying business might pay a bribe. 
 However, there is one unusual set of circumstances in which it is theoretically possible for a business in the UK tax net to pay a bribe without committing an offence in the UK. That is where a non-UK national in an overseas branch of a UK company pays a bribe and does not report that bribe to the UK head office. No offence is committed in the UK because there is neither a knowing mind in the UK, nor a UK national directly involved in the payment. Such instances will be rare and there is no evidence that there is a problem in practice, so I can tell the hon. Member for Torridge and West Devon (Mr. Burnett) that we are correcting a technical anomaly in tax law. We already have a system in which, by and large, bribes are not tax-deductible in the UK, and we are not making a major change that will impact on UK business.

John Burnett: I am interested to hear from the Financial Secretary what the practice is in our main competitor countries.

Ruth Kelly: We are moving towards international best practice. I cannot tell the hon. Gentleman exactly what happens in other countries, although I can tell him that our approach is similar to that in the United States and other countries. We have undertaken this change in response to the recommendation from the Organisation for Economic Co-operation and Development in 1996 and the subsequent convention on bribery in 1997.

Michael Jack: I am intrigued to know how many of the accounts examined by the Inland Revenue have a neat little insertion that states ''payment of bribe.'' I find it difficult to imagine that anyone involved in shady
 practices would make their actions so blindingly obvious that the Government think that there is a loophole to close. Perhaps the Financial Secretary could enlighten us about what triggered the need for such a provision.

Ruth Kelly: The right hon. Gentleman makes an interesting point. It is not currently a real problem for the Revenue, which does not collect information on the extent of bribes. We know that such cases are rare because few are reported by local tax inspectors, who are interested in how such payments should be treated for tax purposes. It has not been brought to our attention often, but it is a point of principle that we should not give tax relief for corrupt payments, whether they take place knowingly through headquarters in the UK or not. For those reasons, we want to close the loophole.
 Given that we think the problem is relatively minor, we do not think that closing the loophole will have a substantial impact on British companies doing business abroad. On a point of principle, we should not countenance a situation in which British businesses pay bribes in order to win business. That is not the reality, because bribes tend to distort rather than help trade and competition.

Michael Jack: I do not dissociate myself from anything that the Minister said, but what about the probing that might occur if a United Kingdom company put a line in its accounts such as ''special commission payment''? Would such an entry be subjected to more detailed analysis by the Inland Revenue to establish more clearly the motive for a payment that caught an inspector's eye?

Ruth Kelly: The right hon. Gentleman raises a purely hypothetical and speculative point, which is of no practical relevance. Tax inspectors are trained to know accounts and would of course raise such a payment with the head office, but I would not expect that to be a problem in practice.
 The hon. Member for Arundel and South Downs asked whether we should extend the bribery measure to offences committed under the law of other countries as well as our own. There is no European Union angle, as he suggested; we are merely following OECD guidelines in this case. We want the maximum degree of certainty for United Kingdom companies, which the measure will deliver. 
 The hon. Gentleman also asked whether the disallowance of deduction on a bribe in several countries could amount to multiple taxation. I do not believe that it would, because head office expenses would be allocated between branches in different countries and each country would apply its national law to those expenses. A bribe should not be deductible in any country, and it will not be multiple taxation. 
 The hon. Gentleman asked whether the clause would apply if a foreign company paid a bribe overseas and attributed part of its bribe to the United Kingdom branch as a management charge. I agree in principle that it would apply, although it would depend on the facts of the case. The part of head office expenses that 
 would be disallowed should equally be disallowed in the tax computation for the United Kingdom branch of a non-resident company. That is already the case for expenditure on such items as business, entertainment and gifts, and the Inland Revenue is not aware of any significant compliance issue in that regard. 
 For all those reasons, I ask the Committee to welcome the clause and agree to its implementation.

Howard Flight: In principle, all hon. Members agree with the clause. In practice, I do not think that the clause will solve the problem 100 per cent., for obvious reasons. In some economies, practices such as bribery remain widespread. I do not know whether it is still the case, but in the past the French equivalent of the Export Credits Guarantee Department was a vehicle for Government bribery for contracts. A rash of scandals broke out in that respect, so I trust that the OECD has tied that matter up.
 Another aspect of the territory is shown by the Tate & Lyle case, which we might have discussed under new clause 11, had it been called. That case decided that when political donations were made wholly or exclusively for the purposes of trade, they could be tax-deductible. In the spirit of clause 67, will the Government reconsider that territory? They should make it clear that tax deductibility would be denied to companies or other persons carrying on a trade who make payments to political parties in return for political favours, such as a change in the law, an honour or a Government decision, and that cases such as the Ecclestone, Desmond, Powerjet, Mittal and Hinduja cases will not give rise to tax-deductible expenses.

Ruth Kelly: I am sure that all Committee members subscribe to the view that we should have the greatest integrity in our tax affairs. Of course, we continually update our tax policy to reflect those principles and we keep such matters under review. However, the hon. Member for Arundel and South Downs specifically asked about political donations. For the record, the general expenses rule is that only expenses incurred wholly or exclusively for business purposes are deductible when computing business profits. Donations to political parties would not satisfy that test and would not, therefore, qualify for relief. I hope that the whole Committee will support the clause as it stands.
 Question put and agreed to. 
 Clause 67 ordered to stand part of the Bill.

Clause 68 - Qualifying contracts for unallowable purposes

Howard Flight: I beg to move amendment No. 114, in page 45, line 41, at end insert—
 '(8A) A qualifying contract shall not be regarded as having an unallowable purpose in regard to a company where, on the application of that company, the Board have notified the company that the Board are satisfied that the contract does not have an unallowable purpose.
 (8B) Any application under subsection (8) shall be in writing and shall contain particulars of the contract to be entered into by the applicant and the Board may, within 30 days of the receipt of the application or of any further particulars previously required under this subsection, by notice require the applicant to furnish further particulars for the purpose of enabling the Board to make their decision; and if any such notice is not complied with within 30 days or such longer period as the Board may allow, the Board need not proceed further on the application.
 (8C) The Board shall notify their decision to the applicant within 30 days of receiving the application or, if they give a notice under subsection (8A) above, within 30 days of the notice being complied with.
 (8D) If the Board notify the applicant that they are not satisfied as mentioned in subsection (8) or do not notify their decision to the applicant within the time required by subsection (8B), the applicant may within 30 days of the notification or of that time require the Board to transmit the application, together with any notice given and further particulars furnished under subsection (8A), to the Special Commissioners; and in that event any notification by the Special Commissioners shall have effect for the purposes of subsection (8) as if it were a notification by the Board.
 (8E) If any particulars furnished under this section do not fully and accurately disclose all facts and considerations material for the decisions of the Board or the Special Commissioners, any resulting notification that the Board or Commissioners are satisfied as mentioned in subsection (8) shall be void.'.

Joe Benton: With this it will be convenient to take the following amendments: No. 115, in schedule 25, page 303, line 23, at end insert—
 '30A In paragraph 13 of Schedule 9, after subparagraph (5) insert—
 ''(5A) A loan relationship shall not be regarded as having an unallowable purpose in regard to a company where, on the application of that company, the Board have notified the company that the Board are satisfied that the loan relationship does not have an unallowable purpose.
 (5B) Any application under subparagraph (5A) above shall be in writing and shall contain particulars of the loan relationship to be entered into by the applicant and the Board may, within 30 days of the receipt of the application or of any further particulars previously required under this subparagraph, by notice require the applicant to furnish further particulars for the purpose of enabling the Board to make their decision; and if any such notice is not complied with within 30 days or such longer period as the Board may allow, the Board need not proceed further on the application.
 (5C) The Board shall notify their decision to the applicant within 30 days of receiving the application or, if they give a notice under subparagraph (5B) above, within 30 days of the notice being complied with.
 (5D) If the Board notify the applicant that they are not satisfied as mentioned in subparagraph (5A) above or do not notify their decision to the applicant within the time required by subparagraph (5C) above, the applicant may within 30 days of the notification or of that time require the Board to transmit the application, together with any notice given and further particulars furnished under subparagraph (5B) above, to the Special Commissioners; and in that event any notification by the Special Commissioners shall have effect for the purposes of subparagraph (5A) above as if it were a notification by the Board.
 (5E) If any particulars furnished under this paragraph do not fully and accurately disclose all facts and considerations material for the decision of the Board or the Special Commissioners, any resulting notification that the Board or Commissioners are satisfied as mentioned in subparagraph (5A) above shall be void.''.'.
 No. 116, in schedule 26, page 344, line 23, at end insert—
 '(3A) A derivative contract shall not be regarded as having an unallowable purpose in regard to a company where, on the application of that company, the Board have notified the company that the Board are satisfied that the derivative contract does not have an unallowable purpose. 
 (3B) Any application under subparagraph (3A) above shall be in writing and shall contain particulars of the contract to be entered into by the applicant and the Board may, within 30 days of the receipt of the application or of any further particulars previously required under this subsection, by notice require the applicant to furnish further particulars for the purpose of enabling the Board to make their decision; and if any such notice is not complied with within 30 days or such longer period as the Board may allow, the Board need not proceed further on the application. 
 (3C) The Board shall notify their decision to the applicant within 30 days of receiving the application or, if they give a notice under subparagraph (3B) above, within 30 days of the notice being complied with. 
 (3D) If the Board notify the applicant that they are not satisfied as mentioned in subparagraph (3A) above or do not notify their decision to the applicant within the time required by subparagraph (3C) above, the applicant may within 30 days of the notification or of that time require the Board to transmit the application, together with any notice given and further particulars furnished under subparagraph (3B) above, to the Special Commissioners; and in that event any notification by the Special Commissioners shall have effect for the purposes of subparagraph (3A) above as if it were a notification by the Board. 
 (3E) If any particulars furnished under this paragraph do not fully and accurately disclose all facts and considerations material for the decision of the Board or the Special Commissioners, any resulting notification that the Board or Commissioners are satisfied as mentioned in subparagraph (3A) above shall be void.'.

Howard Flight: The clause inserts an unallowable purpose, anti-avoidance clause in the financial instrument rules and mirrors the existing rule for corporate debt purposes, the paragraph 13 rule. There is a general acceptance that that rule is unclear and untested in the courts. We propose that a statutory clearance procedure should be included in the legislation as an option to give companies certainty when entering into complicated commercial arrangements.
 The unallowable purpose rule in the corporate debt legislation has been the subject of widespread criticism. Introducing a mirror image rule in the financial instruments legislation will, potentially, exacerbate rather than ease the situation. The Institute of Directors has made the point that 
 ''This new rule amounts to a general anti-avoidance rule within its limited field. A general anti-avoidance rule ranging over the whole of income tax and corporation tax was carefully considered in 1998. It was decided not to introduce such a rule, for perfectly good reasons. We do not believe that comparable rules should be introduced in limited fields: they generate uncertainty and allow the Revenue to block new tax planning measures retrospectively.'' 
Ideally, the whole clause should be amended to target the tax avoidance schemes that the Treasury regards as unacceptable. Given that the Treasury does not publish details of such schemes, it is not possible to suggest an amendment that covers that. We therefore suggest that, at the very least, the Treasury should offer advance clearance of the transaction to give certainty to business. 
 When we suggested that a statutory clearance procedure be included in the substantial shareholdings legislation, the Minister told us that it would be inappropriate for the Inland Revenue to provide a 
 statutory clearance mechanism due to cost and that businesses would not want it if there was one. That was said to be because the rules on substantial shareholdings had been subject to extensive consultation and we were told that the Inland Revenue guidance notes would clarify any uncertainties. 
 Throughout the consultation process on substantial shareholdings, there were repeated calls for advance clearance procedures, and the same point applies to this clause. Taking first the cost argument and the suggestion that many clearances are obtained simply because the facility exists rather than because there is serious uncertainty, we do not think that that would be the case with the clearance arrangements that we propose. The amendment asks specifically for confirmation that the contract does not have an unallowable purpose--that is, that it meets the requirements of the legislation. 
 The clearance procedures contained in section 707 of the Income and Corporation Taxes Act 1988 and section 138 of the Taxation on Chargeable Gains Act 1992, the two most widely used Inland Revenue clearances, give the taxpayer certainty on whether a transaction is being carried out for what the Treasury consider to be bona fide commercial reasons, not whether the transaction meets the requirements of clearly worded and tested legislation. Clearly, there is a difference between a clearance that comments on the motivation for the transaction as a whole and one that gives certainty on the imposition of inherently ambiguous and untested legislation. If existing clearances are obtained unnecessarily, perhaps the Treasury should consider the problems with them, rather than dismissing out of hand the need for new clearance procedures in other parts of the tax law. 
 The Minister also stated that one of the reasons for excessive costs is that the position might change and the facts might be different when the transaction takes place. However, one of the conditions of the clearance is that the facts are unchanged. If they are not, taxpayers lose their certainty. That is not in the interest of taxpayers, and it is difficult to imagine why a taxpayer who went to the effort of obtaining a clearance would choose to change the facts. If that were a real concern, an additional condition could be included in the clearance procedure that the onus is on the taxpayer to notify the Treasury about any changes in facts or circumstances. 
 Finally, there is the argument that the legislation has been widely consulted on. I draw the Committee's attention to the response of the Chartered Institute of Taxation, which was submitted to the Inland Revenue last October: 
 ''The total disregard of the unanimous opposition to extension of Sch 9 para 13 FA 1996 is regrettable. It is no doubt correct that most of the objections were based on dissatisfaction with para 13 itself. This is because these objections are well-founded. The provision is so obscurely drafted as to be unpredictable in its application. A retrospective application of the provision back to the beginning of the accounting period containing 26 July 2001 is unreasonable. Some transactions would not have been entered into with such legislation in place, not because they were tax avoidance transactions in any reasonable sense of the word, but 
because they might have come within some interpretations of the section because a reduction in tax was a consequence of real business expenditure. At the very least the section should not affect any losses or expenses arising before 26 July 2001. Further we consider that it will be essential for the Inland Revenue to be in a position to offer advance transaction guidance to taxpayers as is proposed in the consultative document.'' 
That is, manifestly, the purpose of our amendment. 
 Given the above comments, it is clear that just because there is a consultation process, it neither means that the resulting legislation will be perfect nor that the Treasury will actually listen to all the consultation responses. The Minister said that there were informal methods of obtaining guidance. That is agreed and accepted, but how often a taxpayer would be prepared to bring his tax inspector into discussions when he is considering entering into a complicated commercial arrangement on an informal basis is debatable for obvious reasons. Surely, a statutory clearance procedure would help the Treasury help the Revenue, because it would have the full facts in advance, and it would help businesses and taxpayers by providing certainty.

Ruth Kelly: Clause 68 is the first of 18 clauses and six schedules that form a package to modernise the structure of the taxation of corporate debt and derivative contracts, and to protect the Exchequer against avoidance schemes in the period before the structural reforms take effect.
 It might help hon. Members if I put the reforms in an overall context before dealing specifically with the clause and the amendment. I gave prior notice to the hon. Member for Arundel and South Downs of my intention to do that. I shall start with a brief account of the background to the reforms as a whole, an outline of what we seek to achieve and an indication of how the clauses fit together. 
 The existing legislation is as follows: first, the foreign exchange gains and losses—or forex—legislation enacted in the Finance Act 1993, which introduced a statutory regime for taxing companies' foreign exchange gains and losses. Secondly, there is the financial instruments legislation enacted in the Finance Act 1994, which introduced another statutory regime for taxing companies' profits and losses from interest rate and foreign currency swaps, options and futures. Thirdly, the corporate and Government debt—or loan relationships—legislation enacted in the Finance Act 1996, which brought in a new statutory regime for taxing gilts and corporate debt instruments, including ordinary borrowing and lending. 
 Although all three regimes were thought radical in their time, they have suffered from two main problems: complexity and lack of fairness. The 1993 forex legislation was particularly complex. Companies and tax professionals have long complained about the incomprehensibility of some of its drafting. Few will mourn its passing. The 1994 financial instruments rules were prescriptive, and do not cover all the derivative instruments now available in the markets. 
 The 1996 loan relationships legislation was drafted in a more user-friendly way, in most cases following companies' accounts. However, it was criticised even before the Act had passed its parliamentary stages 
 because its detailed rules for determining when bad debt relief is available were unduly harsh. With the passage of time, it has become apparent that those rules can act as a disincentive to lend, especially to smaller companies, or to participate in corporate rescues. All three regimes have proved to be highly susceptible to artificial avoidance arrangements. The Government are determined to remove avoidance opportunities as far as possible, so that all companies pay their fair share of tax and compete on a level playing field. 
 The Government's objectives in formulating these reforms are those that underlie our strategy for corporate tax reform generally. We aim to create a coherent regime governing the taxation of debt and derivative contracts that is generally as applicable as possible, minimises departures from the profit or loss shown in the accounts, is comprehensive—retaining exclusions only where they can be fully justified—and is based on principles that will provide stability for business in the longer term. 
 The clauses introduce three structural reforms, all taking place concurrently. First, we are repealing the existing financial instruments regime and replacing it with a new regime that covers a far wider range of derivative contracts, is aligned more closely with accounting practice, and is more user-friendly. Secondly, we are repealing the current regime for foreign exchange gains and losses, and merging the necessary rules into the legislation for loan relationships and derivative contracts. Thirdly, we are changing the loan relationships rules, mainly to make them fairer by allowing bad debt relief in a range of circumstances where relief is not available at present. 
 Those structural reforms will take effect from a company's first accounting period to start on or after 1 October 2002, giving companies the time they need to plan properly for their implementation. The design of the structural reforms is intended to minimise avoidance opportunities, but in advance of their implementation the Government are not prepared to allow tax avoidance to undermine the corporate tax system. We are, therefore, bolstering the existing regimes with a series of measures intended to stop particular avoidance arrangements. To be effective, those need to operate from the dates they were announced. 
 The hon. Member for Arundel and South Downs queried why we could not delay their implementation, but if we did that, significant sums would leak from the Exchequer during the interim period. We have published draft clauses to allow companies to implement and take on board the changes from the date on which they were published. The reforms have been the subject of extensive consultation since November 2000. Three consultation documents have been issued--the latest, which contained the draft clauses, in December 2001. 
 In addition, there have been substantial informal discussions, which have been very constructive and helpful in developing the legislation, among the 
 Revenue, representative bodies and tax practitioners. Many companies have participated in the consultation process both individually and through the CBI and other representative bodies. I should like to take this opportunity to thank all those who took part in the consultations, which resulted in widespread agreement that the reforms should be implemented. 
 Before I deal with the amendments tabled by the hon. Member for Arundel and South Downs, I shall turn to the clause itself, which will insert a new anti-avoidance rule into the 1994 financial instruments legislation. It is closely modelled on the unallowable purposes rules that the loan relationships legislation has contained since its enactment in 1996. The clause will allow tax deductions where the main purpose, or one of the main purposes, of a company being party to a financial instrument is not commercial. A purpose related to activities outside the corporation tax net will not be considered as a commercial purpose. The clause is aimed at stopping certain types of artificial tax avoidance. To the extent that tax avoidance is a main motive behind a company becoming party to a financial instrument, it will be denied tax deductions, thereby defeating the avoidance. 
 As was noted in 1996 when the original loan relationships and allowable purposes rules were introduced, companies that enter into schemes with the primary aim of avoiding tax will inevitably be aware of that fact. The transactions at which the rule is aimed are not those into which companies stumble inadvertently. As a top tax adviser said at the time, ''Companies will know when they are entering serious tax avoidance. Apart from anything else, they are likely to be paying fat fees for clever tax advice and there will commonly be wads of documentation.'' Consequently, provided that companies enter into financial instruments with genuine commercial activities or investments, they should have nothing at all to fear from the unallowable purposes rules, but if they go in for artificial tax-driven arrangements, they may find themselves caught. 
 Amendments Nos. 114 to 116 seek to introduce clearance procedures for the unallowable purposes rules. There are three amendments because the Bill introduces unallowable purposes rules in three places. Clause 68 will add an unallowable purposes rule to the existing financial instruments rules, which will be replaced by the new derivative contracts rules in clause 82 that include their own unallowable purposes rule. 
 The abolition of the separate forex rules means that foreign exchange gains and losses will become subject to the existing unallowable purposes rule in the loan relationships rules. As the hon. Member for Arundel and South Downs has explained, the amendments would each provide a clearance procedure so that a company could apply to the Inland Revenue for confirmation, or otherwise, that the relevant unallowable purposes rule would not apply to any transaction for which the company obtained clearance. For reasons that I shall explain--they bear some similarity to the debates that the Committee has already had on other aspects of the Finance Bill--such clearance procedures would be both unnecessary and 
 undesirable. I therefore have to tell the hon. Gentleman that I shall not recommend that the Committee accept the amendment. 
 First, the clearance procedure is unnecessary. It is modelled on existing clearance mechanisms, but such statutory clearances are relatively rare in tax law. Where they do exist, it is normally for historical reasons. Tax law contains a large number of anti-avoidance provisions, most of which do not have a statutory clearance procedure because they do not need one. The main exceptions to the rule that anti-avoidance provisions do not contain clearance procedures are the anti-avoidance provisions on transactions in securities contained in section 703 and those on mergers and reconstructions in section 138. 
 The amendments are based on provisions introduced in 1960 and 1977 respectively, when the idea of anti-avoidance provisions was novel. Section 703 is often said to be the first anti-avoidance provision, and it is understandable that a statutory clearance procedure was thought necessary to allay fears. We have come on a long way since then. Anti-avoidance provisions are now commonplace and well understood, so that more modern provisions do not have clearance procedures. That is true of the unallowable purposes rule for loan relationships, which is commonly known as paragraph 13 and was enacted in 1996. It has existed for six years without a clearance procedure. 
 Although this provision is said to give rise to some uncertainty, we are not aware of its having constituted a significant barrier to legitimate commercial activity. However, it has been a significant and effective inhibition on tax avoidance. We see no reason why the new provisions should cause the damaging level of uncertainty that the hon. Gentleman foresees. 
 The second reason for rejecting the amendment is that a statutory clearance procedure would be undesirable in practice, partly because of the resource implications. The number of qualifying contracts and loan relationships for which clearance might be sought is huge. Today's sophisticated financial markets trade many thousands of derivative contracts every day and many thousands of loans are taken out and debt instruments issued every day. That may be contrasted with the situation in which there is already, in practice, a statutory clearance procedure. The Inland Revenue receives a substantial number of applications--around 4,000 a year for company reconstructions--but the number of reconstructions is far fewer than the number of derivatives or loan relationships. 
 It may be argued that a statutory clearance procedure would not be needed for every derivative transaction or loan relationship. That is so, but nevertheless, clearance procedures add unnecessary administrative and compliance costs. If there is a statutory procedure, applications must be made, if only as an insurance, even when there is no realistic likelihood that the provision could apply. The resources that would be devoted to clearance 
 applications by companies and their advisers and within the Inland Revenue make that an impractical proposition. 
 A statutory clearance procedure would also be undesirable if it was abused, as I fear it could be, by the minority of companies that seek to avoid paying a fair share of tax. Artificial, marketed avoidance schemes have been a feature of the financial instruments regime. That is one reason for replacing the existing financial instruments regime with a new derivative contracts regime. The ability to test the limits of acceptability, perhaps by using a series of clearance applications, could facilitate yet more avoidance. 
 Having said all that, I fully accept that companies and their advisers need to have some idea of what transactions are likely to come within the unallowable purposes rule. Most companies that enter into avoidance schemes will inevitably be aware of that fact. Companies do not stumble inadvertently into the sort of transactions at which the rule is aimed. If they enter into transactions for genuine commercial activities or investments, they should have nothing to fear. 
 To assist them even further, the Inland Revenue has already published guidance based on its experience of operating paragraph 13, to which the hon. Member for Arundel and South Downs referred, and the existing loan relationships unallowable purposes rule. Companies should be able to take comfort from the fact that, if they stay within that guidance, they will not fall foul of the anti-avoidance test. If they are in any doubt, they can of course approach their tax inspector informally. The hon. Gentleman said that companies may be reluctant to ask their tax inspector whether what they are doing is legitimate, but perhaps he agrees that if there is real tax avoidance, companies will have sought professional advice on how to avoid tax in a particular circumstance. If their activities are genuinely commercial, they have nothing to fear from the provisions and should have no hesitation in discussing what they are doing with their local tax inspector. 
 For all those reasons, it is both cheaper and more effective to have no formal statutory clearance mechanism. I therefore urge the Committee to reject the amendment.

Mark Field: I rise to speak to the clause, because I am sure that we shall not have a stand part debate, and to the amendments.
 I give credit to the Government for the significant consultation exercise. I have been in touch with a number of institutions in the City of London and we have tabled few amendments on the provisions because, as was rightly pointed out, there have been at least three stages of consultation during the past 18 months or so. For that, the Government must be congratulated. 
 Equally, past legislation in this area has not been unimpeachable. We have a moving goal because of fast-moving, globalised finance, and the subject is technical so amendments must be made from time to time. The advice that I have received from several institutions suggests that at this juncture they are at 
 least comfortable with most of what is proposed in the clause. The proof will be in the pudding. The concerns that have been expressed by my hon. Friend the Member for Arundel and South Downs and others, here and elsewhere, is that the Treasury has a tendency to meddle in so many areas. Although certain aspects of its work will be welcomed, other bits will be seen as tampering for the sake of it. 
 The City of London is an important financial centre and a centre of invisible earnings for this country. I have a philosophical concern that a feeling exists that taxes must be raised, and that banks and other financial institution must go about their business ensuring that they pay a fair amount of tax; it is somehow seen as illegitimate to avoid tax and utilise the tax system. The idea that financial institutions should be willing to take everything on the chin and not use the system to their benefit is a matter of concern. 
 The Financial Secretary assured us that it will be up to a financial institution to go to the local tax inspector for advice in advance. However, the area is extremely technical, so I wonder whether in practical terms that will give much comfort to financial institutions, which could find themselves in a difficult position when acting on behalf of clients—they may find that a structure that they have put in place collapses and becomes tax liable. A difficulty that the hon. Lady pointed out was that institutions will receive tax advice from a leading tax QC or law firm, but that tax advisers must give balanced advice. My concern is that, likewise, the local tax office would give an on-balance decision only. When large sums of money are at stake in some of the more complex structures that have been introduced to the financial services sphere, that is not good enough. 
 Some of the amendments should be welcomed. The City institutions to which I have spoken feel that there has been a significant and acceptable level of consultation. I hope only that we will not have to unpick everything in the next two or three years when some of the implications become apparent.

Howard Flight: I thank the Financial Secretary for her response, and I echo the point just made that everyone is well aware that there has been extensive consultation. Although, I cannot resist commenting that the number of Government amendments is substantial—clearly, consultation was not completely complete—I welcome the fact that amendments have been tabled late in the day to address some of the problems presented by certain causes.
 As my hon. Friend the Member for Cities of London and Westminster (Mr. Field) said, we do not have a great deal to say as we proceed through clause 82. I simply make the point that the issue of informal versus formal statutory clearance needs in-depth consideration. I have known circumstances where there has been a problem with informal clearance and it has never been given because inspectors of taxes feel 
 that they are out of their depth or they do not want to give an opinion. However, as far as possible we wish to retain the sharpest of clarity in our tax law. 
 I question whether the informal clearance mechanism will actually work. In the co-operative spirit of the Revenue, it is potentially better than statutory clearance in that it is more flexible. However, it will need to be kept under review and if, in such complex anti-avoidance areas, informal clearance were found not to be satisfactory, any Government would need to consider formal statutory clearance arrangements. 
 Clearance is the main issue in the clauses and although the amendments are tabled to clause 68, they relate to several other clauses in this group. We will not press the matter to a vote, but our view is that an open mind must be kept as to whether the informal clearance arrangements are delivering what is needed economically. I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Clause 68 ordered to stand part of the Bill.

Clause 69 - Forward premiums and discounts under currency contracts

Question proposed, That the clause stand part of the Bill.

Howard Flight: There has been some criticism levelled at the way that the revised clauses were introduced with immediate effect from 26 July 2001, which was the date on which the original draft clauses were published. The measure could be retrospective legislation in that it applies to contracts that were taken out before the publication of the draft legislation, whereas the Chartered Institute of Taxation has suggested that the provision ought to apply to contracts taken out after 26 July 2001. Are we right that that is what the clause means? If so, it is clearly a bad precedent to introduce retrospective tax legislation.

Ruth Kelly: Clause 69 is an anti-avoidance rule that amends a special computational rule in the financial instruments legislation to ensure that it works as originally intended. It deals with the recognition of forward premiums and discounts, which are amounts equivalent to payments and receipts which accounting convention requires to be recognised in some circumstances.
 The hon. Member for Arundel and South Downs is concerned about whether the rule is in any sense retrospective. I do not believe that it is. The new rule applies only to forward premiums and discounts—which should be recognised under UK GAAP—attributable to the period from 26 July 2001, the date on which the rule was announced and the clause first published. 
 I reiterate to the hon. Gentleman and to the Committee that such anti-avoidance measures are designed to catch sophisticated, carefully designed processes designed purely to avoid tax that is owed to 
 the state. I do not for a moment share the philosophical doubts of the hon. Member for Cities of London and Westminster about the legitimacy of raising a fair share of taxation from particular individuals or companies. I take the principled view, which I think is shared on the Labour Benches, that we should create a level playing field where everyone pays a fair share of tax. That is what the clause is designed to do.

Howard Flight: I wish just to make the point that I was expressing the concerns of the Chartered Institute of Taxation. I am not sure that the Minister answered them, in that there is a difference between the measure being effective from the date of the draft legislation, which is perfectly fair and understandable, and its affecting contracts prior to that. I am well aware that the clause rightly deals with a narrow territory, but I should like clarity on that point.

Ruth Kelly: I have made the position clear. We seek to avoid deliberate tax evasion. In one sense, it is updating an existing measure providing that tax should not be avoided. Companies should have no difficulty in interpreting what is and what is not tax avoidance. We do not want to miss the opportunity of avoiding leakage to the Exchequer, which the clause seeks to stop.

Howard Flight: I am slightly concerned by what the Minister said. No one likes tax avoidance, and it is fine that people should pay their fair dues and so on. However, the law is the law and, as I have pointed out on many occasions, there is great strength in the Anglo-Saxon heritage in the UK and the USA compared with continental Europe, where there is a lack of clarity about the difference between avoidance and evasion. Such a lack of clarity leads to tax evasion and to a corrupt society. That is the reason for the massive evasion of tax on interest by German savers—[Interruption.]

Joe Benton: Order. I ask hon. Members to keep the noise levels down.

Howard Flight: Thank you, Mr. Benton.
 Tax evasion became socially acceptable because of a lack of clarity about the difference between evasion and avoidance. Laws are passed by Parliament, courts interpret those laws and, by and large, people will take measures if they legally can to reduce their tax liabilities. It is a question of what is within the law and what is without it. The tidying up of laws that permitted avoidance—it may have been perfectly correct; in essence, it was commenting on the fact that the original law may not have been clear enough—is time-consuming and complex, but it needs to be done if we are to keep our principle. However, it is not correct to say, ''Oh, because we are blocking up a tax avoidance scheme, we do not mind its being retrospective.'' That is not in the tradition of British tax law. If that principle were to be followed, one would find that it led the country down some fairly undesirable byways.
 I still ask my question on that narrow point. It is totally fair and reasonable to announce something on a particular date and say, ''From now onwards, the law is clear.'' However, it is relevant whether it applies retrospectively to contracts taken out before that date.

Rob Marris: If I understand him correctly, I have some sympathy with what the hon. Member for Arundel and South Downs says. I wonder whether the Minister would clarify part of new section 168A to the Finance Act 1994, inserted by clause 68.
 Subsection (3), at the top of page 46, allows an apportionment procedure for qualifying contracts for the purposes of dealing with the date of 26 July 2001. I cannot see that sort of apportionment for before and after that date in clause 69. I may not have read it correctly, or the contracts may be so complex that I do not understand them. Will the Minister explain why such apportionment is provided under clause 68 but not clause 69, which appears to give the retrospection about which I am uneasy?

Ruth Kelly: It may help the Committee if I explain what the clause is intended to achieve. The clause is an anti-avoidance rule that deals with the recognition of forward premiums and discounts, which are amounts equivalent to payments and receipts that accounting convention requires be recognised in some circumstances. At the moment, avoidance schemes are set up that attempt to establish a mismatch between the amount of such premiums or discounts shown in accounts on one hand and the amount recognised for tax purposes on the other. That strikes me as a clear case of deliberate tax avoidance.
 The amended rule aligns the recognition for tax of a forward premium or discount, as recognised under United Kingdom GAAP. It is a sensible measure that does not go against the tax tradition in this country, as the hon. Member for Arundel and South Downs implies that it will. Anti-avoidance rules always apply to existing contracts; it is not retrospective but prospective, and applies from the date from which the draft clause is published. In 1996, the Conservative party introduced just such an anti-avoidance measure when it was in government. I hesitate to look at the right hon. Member for Fylde because he may have been the Minister who sat where I am sitting now and proposed such a provision. We are merely following precedent. I rest my case.

Howard Flight: The Chartered Institute of Taxation has commented that during the consultation process the changes proposed did not solve the problem of divergence between amounts recognised for tax and those recognised in the company's profit and loss account. The institute suggested that rewriting the operative provisions would solve the problem satisfactorily. Why did the Government not decide to rewrite the provisions entirely?

Ruth Kelly: We have consulted extensively on the clauses that we have been discussing, which have not on the whole been criticised but generally welcomed by those in the industry who deal with complex financial
 instruments, derivatives and loan relationships. They mark an advance on the previous legislation. The structural reforms make avoidance far less likely in future, in addition to the specific anti-avoidance measures.
 Of course, such measures introduce an additional element of complexity; that is to be expected, but a balance must be drawn between protecting the interests of the Exchequer and the ease with which the measures can be carried out. 
 The hon. Gentleman suggests that we should have rewritten the rules. In fact, we have done so, and if he reads schedule 26 he will see a case in point. 
 Question put and agreed to. 
 Clause 69 ordered to stand part of the Bill. 
 Clauses 70 to 78 ordered to stand part of the Bill.

Schedule 23 - Exchange gains and losses from loan relationships etc

Amendments made: No. 157, in page 264, line 34, after 'business' insert 
'and falls within subsection (4) below'.
 No. 158, in page 265, line 1, after '(3)(a)' insert 'or (c)'. 
 No. 159, in page 270, line 5, leave out 'or Schedule A business' and insert 
', a Schedule A business or an overseas property business (within the meaning of section 70A of the Taxes Act 1988)'.
 No. 160, in page 270, line 7, leave out 'or Schedule A business' and insert 
', Schedule A business or overseas property business'.
 No. 161, in page 271, line 27, leave out from 'any' to end of line 31 and insert 'exchange gains or losses.''.'. 
 No. 162, in page 272, line 43, after 'would' insert 
', or would apart from section 84A(2) to (10) of this Act,'.
 No. 163, in page 273, line 41, at end insert— 
 'Life assurance business 
 13A (1) Paragraph 1 of Schedule 11 is amended as follows 
 (2) Before sub-paragraph (2) (effect on debits and credits of applying I minus E basis to profits and gains from loan relationships of insurance companies referable to life assurance business) insert— 
 ''(1B) In applying the I minus E basis for any accounting period in respect of any life assurance business carried on by an insurance company, no exchange gains or losses shall be taken to arise for the purposes of section 100 of this Act except to the extent that the money debt for the purposes of that section— 
 (a) arises as a result of an amount of income or expenses which falls to be taken into account in applying the I minus E basis not being paid when it is due and payable; or 
 (b) is one that is treated as a money debt for the purposes of that section by virtue of subsection (11)(a) of that section in accordance with subsection (12) of that section by reference to a Schedule A business or an overseas property business. 
 This sub-paragraph has effect notwithstanding sub-paragraph (1) above.''.'.
 No. 164, in page 273, line 43, leave out sub-paragraph (1).
 No. 165, in page 274, line 1, after '3A' insert 'of Schedule 11'.—[Ruth Kelly.] 
 Schedule 23, as amended, agreed to. 
 Clause 79 ordered to stand part of the Bill. 
 Schedule 24 agreed to. 
 Clauses 80 to 81 ordered to stand part of the Bill.

Schedule 25 - Loan relationships

Amendments made: No. 127, in page 286, line 7, leave out sub-paragraph (4). 
 No. 128, in page 289, line 14, at end insert 
'and the shares are not, within the meaning of Chapter 1 of Part 12 of the Taxes Act 1988, assets of an insurance company's long-term insurance fund (see section 431(2) of that Act)'.
 No. 129, in page 292, leave out lines 1 to 11 and insert— 
 ' ''(6) Where— 
 (a) a company ceases to be a party to a loan relationship in an accounting period (the ''cessation period''),
(b) profits, gains or losses arise to the company from the loan relationship or a related transaction in that accounting period, and 
 (c) the credits or debits brought into account for the purposes of this Chapter for that accounting period do not include credits or debits which represent the whole of those profits, gains or losses, credits or debits in respect of so much of those profits, gains or losses as are not represented by credits or debits brought into account for the cessation period shall continue to be brought into account under this Chapter over one or more subsequent accounting periods (''post-cessation periods'') as in the case of a loan relationship to which the company is a party in those periods and subsections (7) and (8) below shall apply. 
 (7) In any case falling within subsection (6) above, any question— 
 (a) whether, in a post-cessation period, the company is to any extent a party to the loan relationship— 
 (i) for the purposes of a trade carried on by it, or 
 (ii) for any other particular purpose or purposes, or 
 (b) whether, in a post-cessation period, the loan relationship is to any extent referable to a particular business, or a particular class, category or description of business, carried on by the company, shall be determined by reference to the circumstances immediately before the company ceased to be a party to the loan relationship instead of the circumstances in the post-cessation period. 
 (8) In any case falling within subsection (6) above, any question— 
 (a) whether the loan relationship has to any extent a particular purpose in a post-cessation period, or 
 (b) whether there is a connection between the company and any other person for a post-cessation period, shall be determined by reference to the circumstances in the cessation period instead of the circumstances in the post-cessation period.''.'.
 No. 130, in page 294, line 9, at end insert— 
'and the debt is not one that is owed to, or to persons acting for, a limited partnership which is a collective investment scheme within the meaning of section 235 of the Financial Services and Markets Act 2000'.
 No. 131, in page 298, line 3, leave out '2001' and insert '2002'. 
 No. 132, in page 299, line 41, leave out 'Article 21' and insert 'Part 3'.
 No. 133, in page 300, line 38, leave out '(9)' and insert '(7)'. 
 No. 134, in page 300, line 40, after 'if' insert '(a)'. 
 No. 135, in page 300, line 43, leave out 
'(within the meaning of section 87 of this Act)'. 
No. 136, in page 300, line 45, at end insert 
'; and 
 (b) the first accounting period of the creditor company for which there is or was such a connection is an accounting period beginning on or after 1st October 2002'.
 No. 137, in page 301, line 8, leave out from 'the' to end of line 10 and insert 
'accounting period mentioned in sub-paragraph (2)(b) above.'.
 No. 138, page 301, line 19, leave out from 'connection' to 'between' in line 20. 
 No. 139, in page 301, line 37, leave out 'sub-paragraph (6) above' and insert 'this paragraph'. 
 No. 140, in page 301, line 41, at end insert 'or'. 
 No. 141, in page 301, line 43, leave out from 'person' to end of line 46. 
 No. 142, in page 301, line 49, leave out 'paragraphs (a) to (c)' and insert 'paragraph (a) or (b)'. 
 No. 143, in page 302, line 1, leave out from 'above' to end of line 10 and insert 
' ''control'' has the meaning given for the purposes of section 87 by section 87A of this Act.''.'.
 No. 144, in page 304, line 2, at end insert— 
'but nothing in sub-paragraph (1) or paragraph (b) above shall prevent any credit in respect of interest from being brought into account for the purposes of this Chapter by the person described in that paragraph.'.
 No. 145, in page 304, line 9, at end insert— 
 '(1A) In sub-paragraph (1) (accounting periods to which the paragraph applies) for paragraph (b) substitute— 
 ''(b) at any time in that period another company stands in the position of a creditor as respects that security;''.'.
 No. 146, in page 304, line 18, at end insert— 
 '(3A) For sub-paragraph (8) (which defines what it is for the benefit of a security to be available to a company) substitute— 
 ''(8) Any reference in this paragraph to a person who stands in the position of a creditor as respects a relevant discounted security includes a reference to a person who indirectly stands in that position by reference to a series of relevant discounted securities 
 (8A) Where this paragraph applies by virtue of sub-paragraph (8) above, the reference to the corresponding creditor relationship in sub-paragraph (1)(d) above is a reference to the creditor 
relationship of the company which indirectly stands in the position of a creditor as respects the relevant discounted security.''.'.
 No. 147, in page 304, line 28, leave out 'and'. 
 No. 148, in page 304, line 30, at end insert 
'; and 
 (c) omit the word ''and'' immediately preceding paragraph (b)'.
 No. 149, in page 304, line 36, at end insert— 
 '(3A) At the end of paragraph (b) of that sub-paragraph add ''; and 
 (c) the debt is not one that is owed to, or to persons acting for, a limited partnership which is a collective investment scheme within the meaning of section 235 of the Financial Services and Markets Act 2000.''.'.
 No. 150, in page 304, line 43, leave out from beginning to second 'and' in line 44. 
 No. 151, in page 309, line 12, after 'if' insert '(a)'. 
 No. 152, in page 309, line 14, at end insert 
'; and 
 (b) the shares are not, within the meaning of Chapter1 of Part12 of the Taxes Act 1988, assets of an insurance company's long-term insurance fund (see section 431(2) of that Act)''.'.
 No. 153, in page 313, line 46, at end insert— 
 'Life assurance business 
 39A (1) In Schedule 11 (loan relationships: special provisions for insurers) Part 1 (insurance companies) is amended as follows 
 (2) In paragraph 1 (I minus E basis) after sub-paragraph (1) (which provides that nothing in the Chapter prevents profits and gains from loan relationships of insurance companies referable to life assurance business from being included in profits and gains chargeable in accordance with the I minus E basis) insert— 
 ''(1A) Where— 
 (a) the I minus E basis is applied for any accounting period in respect of any life assurance business carried on by an insurance company, and 
 (b) in that accounting period the insurance company is a party to a loan relationship which is to any extent referable to that business, then, in applying the I minus E basis to that business, sections 92(1)(f), 93(1)(a) and (b) and 96(1)(b) of this Act shall be disregarded in relation to that loan relationship to that extent.''.'.—[Dawn Primarolo.]
 Schedule 25, as amended, agreed to. 
 Clause 82 ordered to stand part of the Bill. 
Further consideration adjourned.—[Mr. Sutcliffe.] 
 Adjourned accordingly at two minutes to Seven o'clock till Thursday 13 June at half-past Nine o'clock.